Gold trades lower as risk heats up in Europe

In the Lead: “Domino Theory In Action”

Gold’s losses aggravated as Thursday’s markets opened for trading and the yellow metal breached the $1,750 support point in the process, falling to a one-week low. The fresh decline (four out of four trading sessions’ worth) took place despite a 0.30% drop in the US dollar on the trade-weighted index but in concert with the fall to under $1.35 by the beleaguered euro and the rise in certain European bond yields back to above “alarm” levels.

However, the principal worry here is the one related to the spreading bond yield wildfire that is now threatening to engulf the markets of Spain and France after having charred those of Greece and Italy. Market participants remain extremely wary of the odds of successfully putting out said fires as the two main actors in this game – France and Germany – are now engaged in arguments over what role the ECB ought to play in this crisis instead of grabbing the nearest hose and extinguishing the flames that threaten to throw the region into an economic contraction – if they haven’t already done so.

Fitch’s Ratings opines that Italy, for one, may already be in a recession. None of that stopped Chancellor Merkel from bluntly (once again) cautioning that “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” Her BFF, Monsieur Sarkozy, might just be one of those ‘politicians.’ He is certainly loath to see La France lose one of its coveted “A” s from the triple crown it currently enjoys.

Other commodities sank as well, most notably copper, which lost 2.85% today on the back of anxiety over the near-term state of Europe’s economy and the housing price slide taking place in China. Values in China’s four largest cities fell by 0.3% in October, lending credence to the school of thought that something has changed in that country and that such a ‘change’ might result in a hard touchdown on the economic tarmac.

China really has no “stand-by and activate” alternatives to economic growth if real estate flounders. Residential property is thought to have accounted for as much as 6.1% of the nation’s GDP last year. Consider the factoid that Chinese housing activities constitute 20% of the country’s steel demand. Talk about over-dependence and irrational exuberance…

Speaking of China, yet another set of bold assertions by the hard money newsletter marketing machines fell victim to reality recently. You do recall being told that China finally became ‘disgusted’ with US assets and that the reduction in purchases of Treasuries by that country in August was ‘the beginning of the end’ of the dollar and of US debt. Cut to reality: China bought not hundreds of tonnes of gold with its money, but the largest amount of US government notes and bonds since March of 2010 in the month of…September.

Oops. The country bought nearly $21 billion in US instruments and bumped up its long-term holdings to $1.14 trillion in the process. Some level of ‘disgust’ that little shopping spree reveals, eh? Not only is China continuing to support the US Treasury market, but all indications are that Japan, too, is not shying away from increasing its stake. The world’s second largest holder of US debt raised its ownership level of such assets by 2.2% and now owns nearly $960 billion of American Treasuries. Total foreign holdings of US obligations came to a record $4.66 trillion in September. Enough said.

Industrial commodities might be headed for a downturn on the combination of ebbing demand from Europe and from China’s inability to make up for that slack with its own demand. Analysts at Capital Economics feel that while China will do its best to keep afloat, it will come to contradict those rosy projections that it alone can support the world’s commodity demand. With expectations that China’s economic growth might contract to the 6% growth pace, crude oil values might just need to be “re-evaluated” as might those of other commodities as well. Early signs of such a reassessment came with this morning’s 2% decline in WTI crude (only 44-cents away from the century mark), but the slippage was largely the result of Euro-centric angst and the profit-taking that was to be expected following the achievement of a five-month pinnacle in prices.